Blockchain aims to radically change the way investors can access funds, says Olivier Portenseigne, Managing Director and Chief Commercial Officer of Fundsquare.
Progress in most industries tends to be incremental but every so often a disruptive technology emerges that has the potential to shake up an entire business model. History provides a number of examples. In 1908, Henry Ford’s Model T became the first affordable car to enter the market and transformed the automobile industry. The advent of the internet in the 90s helped revolutionise the way people access information today.
In the fund industry, Blockchain aims to do something similar by radically changing the way investors can access funds. For too long, fund managers have faced considerable challenges in marketing their products and meeting regulatory requirements while keeping their businesses profitable. Investors have also relied heavily on third-party intermediaries to invest in funds.
In Luxembourg, efforts have been made to reduce costs and increase efficiencies associated with intermediation by automating processes in the fund distribution cycle. However, efforts towards disintermediation have yet to bear fruit. With Blockchain, the fund distribution model is set to undergo a digital transformation that will impact all major players.
Our Model T
In late 2016, Fundsquare partnered with InTech and KPMG to launch FundsDLT, an experimental, decentralised fund order processing engine based on distributed ledger technologies, digital tokens and smart contracts. The aim was to create a shared economy that enables asset managers, with existing actors, to sell directly to retail investors.
The operating model sees an investor going through a smartphone application to access fund information and performing KYC duties, then processing an order by provisioning cash through digitalised token. On the other side, transfer agents will inspect the KYC elements collected and accept the order, while an asset manager can follow up inflows and outflows in the registrar in real time. Once the NAV has been published, the entire settlement process is executed instantaneously.
FundsDLT intends to operate through an API framework that delivers an open standard covering account creation, transaction processing, KYC, payments and entitlements. This is expected to lead to broader changes in Luxembourg’s pool of expertise. Intermediaries like transfer agents have great stores of knowledge and are well placed to play an active role.
Consumers come first
FundsDLT benefits all aspects of the value chain. It is expected to reduce the cost and processing time for transactions by streamlining administrative and order-routing tasks. For example, it can currently take up to three days for a transfer agent to execute a client’s order. This new product will do it in a couple of hours after NAV publication – and in the not-too-distant future, with multiple NAV per day.
The proposed ecosystem created by FundsDLT will also ease AML/KYC and MiFID verification by standardising the process and factoring in such repetitive tasks into a centralised utility. These capabilities draw on smart contracts, considered to be the most secure transaction technologies in existence. As a result, investors, asset managers, custodian banks and transfer agents will share information in a far simpler manner.
More importantly, FundsDLT will work towards providing investors with greater choice. As low interest rates make saving for the future more daunting, investors will need to take an increasingly active role in managing their pensions. With a single ecosystem, investors can get better access to information and choose from a wider selection of funds. A new fund ecosystem like DLT can also reduce barriers to entry and bring “mass affluent investors” into the market.
Getting investors on board will be crucial if the industry is to take the next leap. As the car and internet revolutions demonstrated, the fruits of new technology must be accessible to the masses in order to have a profound impact.
Funds Europe, March 2017